IPR 8 Market Data Ownership Summary: Tension, Conflict & Mutual Need

The issue of Intellectual Property Rights and market data licence management is only going to grow, and likely to lead to increased conflict between the data source owners and the consumers.

It is only fair to consider there are pressures on all parties in the market data industry, (1) The Data Sources (2) The Intermediaries & Facilitators, and (3) The Consumers/Banks.

While there has always been an understandable tension between each of the three parties, the simple recognition that each needs the other two has always been accepted. I believe this ménage à trois has proven to be a robust and enduring relationship because of the practical benefits it provides to all parties, though like all relationships there are awkward moments.

There is always an however, as usage of information and market data expands exponentially the impact of ownership increases accordingly, inevitably overall spend rises.

The business model of the entire industry is predicated upon Intellectual Property Rights. The value placed on original, unique and proprietary data, e.g. Single Sources, and Indices which are a ‘must have’ is creating de facto monopolies potentially open to abuse. The problem transforms when a subscription to a set of market data ceases being a choice, and starts becomes mandatory.

While it is important and necessary for the industry to protect its rights which contrarily promotes growth through re-investment by making it an attractive industry to be in for all, the data sources must avoid situations where the regulators step in.

Paradoxically, regulators are critical stimulators in the growth in market data usage, yet missteps by data sources will cause those same regulators to intervene, and there are 2 immediate potential scenarios.

Neither of the above need happen, yet market data vendors and the Banks must play their part as well, by ensuring their licence management is efficient, effective and transparent.

8.1The Data Sources/Exchanges: Gone Fishing

Senior Management of the vast majority of data sources see market data as being an attractive cash cow that should be continuously exploited. They run a business and need to increase their revenue from market data as it not only produces higher margins, but offers a more stable income stream than fees derived from traditional business lines such as transaction volumes and IPOs.

Fair enough. There are genuine and verifiable benefits for all parties in the market data relationship. Exchanges must invest in providing infrastructure to facilitate trading, which requires fee generation. This money comes from market data fees which are spread out far wider than the direct trading participants, thereby reducing the average cost burden on the subscribers.

Unfortunately, there is the dark side, the temptation for exchanges to leverage compliance audits as revenue generators, with assessments becoming little more than an ill-disguised attempt at money-gouging. This undermines the integrity of the majority of compliance audits, poisons relationships, and creates unnecessary pushback from clients.

The expansion of the client base comes as new species of clients are discovered and new ways of using data is being created.

The deeper the dive, the further exchanges and data sources get from their primary relationships, and the harder it becomes to police and enforce IPRs, especially with the emergence of new channels like ‘The Cloud’. Even when the exchanges adopt direct contracts, and/or billing, there is the element of distance, and reduced communication with a new client universe that is not equipped properly for IPR and licence management.

8.2Market Data Vendors, Intermediaries & Facilitators: Middlemen

Market data vendors are a varied breed, they can be straight forward re-distributors of information and data, data sources in their own right, and in some cases actual trading venues such as Bloomberg Tradebook or Thomson Reuters Dealing, or even a subsidiary of an exchange à la IDC.

For our purposes, they are both consumers and re-distributors, and they are distinguished from the Banks because they supply services to financial markets participants as their business without participating in the markets themselves.

Without the market data vendors, exchanges lack the resources to expand beyond their domestic base. They lack reach. Without the individual exchanges, and other data sources, the market data vendors in turn lack universal coverage.

As consumers of market data, the traditional market data vendors have the most experience in IPR and licence management, and are usually the most frequently audited. Yet some vendors get lost in the sheer amount of documentation required and do not have a complete view of their contractual rights and obligations because their licence management environment is just too complex.

These traditional market data vendors are careful to ensure the parameters of ‘Control, Monitor, Report’ are in place at the next level of distribution, but rarely go further, and that’s when the problems start.

Out of the Line of Sight

The advent and growth of a new breed of secondary middlemen such as ISVs and other facilitators providing out-sourced services is posing a threat to existing licence management, perhaps even to the principle of data licensing. These facilitators deliver analytics, derived data, non-display services to a wide variety of smaller financial institutions.

These new types of vendor usually do not subscribe directly to an exchange feed but source as a sub-vendor. They are often not familiar with data licensing, and may actively see licences as a challenge to ‘uberisation’, without understanding either the impact or basic ownership tenets.

Most importantly they are leaders in developing new markets for information usage and distribution, but along with their clients do not necessarily have (the correct) licences and contracts in place.

The reason for this is mostly due to a lack of awareness. They are out of the direct line of sight of the data sources, and their contracts with the primary vendors reflect that relationship rather than the one with the exchanges.

This introduces new issues where contracts between third parties are at variance with the policies and licences employed by exchanges.

8.3Market Data Consumers, Subscribers & End Users: New Players

Just as traditional market data vendors know and mostly play by rules, so do the larger Banks who have up until now been the backbone of the market data consumer world.

But that world is changing. Like in the vendor and facilitator space there is fragmentation, with new players coming in using data in difference ways, but also the smaller financial institutions and players in secondary markets are being captured within the IPR and licence web.

There are a number of issues the big banks have to face:

For smaller organisations, they face the same issues as their larger brethren, though less likely to have the number of legacy systems or global sprawl.

But they face additional, and onerous challenges.

There is no doubt that for a multiplicity of reasons the need for IPR and licence management is an important requirement, and failing to meet the need opens the door to costly liabilities.

Even smaller institutions can face audit liabilities ranging from US$5 Million to US$10 Million dollars, and that is per exchange, not an absolute figure.

Albert Einstein reportedly defined insanity as “Doing the same thing over and over again and expecting different results.”

Exchanges repeat their audits and often get the same results, proving Einstein right, it is perhaps the financial institutions who are insane for letting them achieve the same results.

8.4IPRs & Crystal Balls

To summarise, it is not all doom and gloom for the future. Issues can be solved once identified, even if some of these issues are new in nature and involve parties temperamentally antagonistic towards traditional IPR structures.

Problems ahead.

Uncontrolled out of licence market data usage by new types of vendors who see licences as a business constraint, plus an unnecessary cost.

Managing market data in a fragmented environment with omni-directional distribution will be a technical and administrative challenge, even if new clients and users are co-operative.

Increased pressure on time and resources. The smaller the organisation the less access to expertise and management. As these firms ingest greater quantities of market data usage they increase the likelihood of out-of-contract usage through not having proper processes in place.

Lack of expertise in smaller organisations. The licence net is enlarging and capturing ever more financial institutions, ancillary players and others in its tight mesh net.

Increased documentation and paperwork. As exchanges increase their offerings, identify new ways to licence usage and expand their client universe this creates additional workload for the clients.

It also creates additional paperwork for the exchanges as well, and they are already slow in responses now.

Problems solved.

Banks will see the issues for what they are, though more pro-active management policies are more likely to come from Risk, Compliance and Internal Audit teams than IT or Central Procurement.

Standardised terms. Exchanges should at least agree on industry standards for terms such as ‘derived data’, and ‘non-display usage’.

Exchanges and Data Sources need to differentiate between the types of consumer, too often they treat vendors and other facilitators like Banks in contractual terms.

Audits must be fair, based upon the original rationale of policing and protecting IPRs, not as revenue generation

Better communication. Knowing IPRs means informing clients in plain, understandable English, and any other language that i

Better education. Good IPR management starts with knowledge.

Better focus on dedicated licence management internally/externally.

Note on ownership law.

While like many in this industry I have a good understanding of contracts and agreements, I am not a lawyer, therefore I recommend a paper from Harvard University’s Berkman Centre for Internet & Society Research Publication Series entitled ‘Information cannot be owned’ by Jean Nicolas Druey.